What is an FHA Home Loan?
FHA home loans are insured by the Federal Housing Administration (FHA), and can only be provided by lenders approved by the FHA. This type of mortgage has a fixed term length of either 15 or 30 years. It’s a popular choice among first-time homebuyers, as well as buyers with limited savings or lower credit scores.
When purchasing a home, you might be responsible for certain out-of-pocket expenses like loan origination fees, appraisal costs, and attorney fees. One of the advantages of an FHA home loan is that the seller, home builder, or lender can cover some of these closing costs on your behalf.
The minimum down payment (3.5%) and credit score requirements (at least 580) of FHA loans are lower than that of many conventional loans. And unlike conventional mortgages, 100% of your down payment can be a gift. This gift can come from any of the following:
The borrower’s relative.
An employer or labor union.
A close friend.
A charitable organization.
A governmental agency or public entity that has a program providing home ownership assistance.
If your credit score is between 500 and 579, you still can qualify for this kind of loan; however, you’ll have to make a larger down payment. Generally speaking, the lower your credit score and down payment, the higher the interest rate you’ll pay on the mortgage
Types of FHA Loans
Traditional – used to finance primary residences.
Home Equity Conversion – (reverse mortgage) allows homeowners 62 years of age and older to exchange their home equity for cash while still retaining title to the home. Funds can either be withdrawn as a fixed monthly amount or as a line of credit.
203(k) Program – includes extra funds to pay for repairs and renovations to your house. For this type of loan, the property may undergo two separate appraisals: an “as is” appraisal that evaluates its current state, and an “after improved” appraisal estimating the value after the work/renovations are finished.
Energy Efficient Program – includes extra funds to pay for energy-efficient home improvements (could potentially lower the cost of your utility bills).
Section 245(a) – a graduated payment mortgage (GPM) with reduced initial monthly payments that increase over time, and a growing equity mortgage (GEM) where fixed increases in monthly principal payments result in shorter loan terms. This program is for borrowers who anticipate an increase in income.
Advantages of FHA Loans
- The DTI and credit score requirements are more relaxed than those of other loan types.
- Lower down payments.
- Increased allowance for closing cost financing.
- Good for first-time homebuyers.
- FHA home loan
Frequently Asked Questions
What’s the difference between pre-qualified and pre-approved?
Pre-qualification is a determination of the loan amount you’re likely to receive. To obtain pre-qualification, you usually are interviewed by a licensed loan officer who determines the pre-qualification amount. On the other hand, to be pre-approved, you must submit an application and verify your credit and financial history. After you receive your pre-approval certificate, you’re in a stronger position to close earlier and negotiate a better price.
How long do FHA loans take to close?
The average FHA loan approval process takes between 30 to 60 days.
If my credit score is low, how can I raise it?
Paying your bills on time, reducing your credit balances, and trying to not apply for credit too often are all ways that you can raise your FICO score.
How many active FHA home loans can I have at one time?
Without the exception of certain extenuating circumstances, borrowers will likely not be approved for additional FHA loans while one is active. Special circumstances that could warrant a borrower having two or more active FHA loans include job relocations, changes in family size, and situations where a co-borrower vacates the property with an existing FHA mortgage loan to purchase a home of their own.
A FHA loan may sound great, but it’s not for everybody. In the words of the Federal Housing Administration, an FHA loan “won’t accommodate those who are shopping on the higher end of the price spectrum—nor is it intended to.”
This kind of mortgage was specifically designed buyers with low-to-moderate incomes; that being said, if you have a larger budget and are looking into purchasing a house that’s a bit pricey, then a conventional loan might better suit your needs.